The idea of disclosure as an effective investor-protection tool should have long since perished by now. New research from the B.C. Securities Commission (BCSC) backs up that concept and should embolden regulators to follow through with more decisive action.
One of the investment industry’s central arguments against regulators’ recent efforts to enhance retail investor protection – such as proposals to introduce best interest requirements and to outlaw certain mutual fund fee structures – is to wait to see how the latest measures designed to boost disclosure inherent in the second phase of the client relationship model (CRM2) work out.
Under this line of argument, there would be no need to raise the investment industry’s conduct standards or intervene with established compensation practices if clients are more fully informed about what they’re paying for advice and their investments and what they’re getting in return. Investors would be empowered to reject poor deals and seek greater value.
But while this idea may be nice in theory, that’s not what happens in the real world. The latest research the BCSC commissioned is the final phase of a four-part, longitudinal study of the impact of CRM2 on investor knowledge and action. The research found that while investors’ understanding of their fees increased, thanks to the CRM2-mandated reports, and satisfaction with the value provided by the industry dropped as a result, this hasn’t increased investor action.
In fact, investors haven’t been any more likely to change firms, switch financial advisors or alter their fee arrangements when they receive thorough cost and compensation disclosure than they were before the CRM2 requirements kicked in. In short, investors may be better informed, but they aren’t more empowered.
Behavioural economics can supply various explanations for this result. However, the bottom line for regulators is that they should accept that the disclosure-based approach to investor protection is severely limited – as far as retail investors are concerned, at least. More decisive measures are warranted if regulators want to deliver adequate retail investor protection.